9/01/1977 @ 12:00AM

The Trials Of Amory Houghton Jr.

Corning Glass Works Chairman Amory Houghton Jr. deserved to be fired. Houghton says so himself: “I really should have been.” In the 1974-75 recession, he concedes, Corning’s earnings dropped so fast that–again in his words–”the integrity of the company was in danger.” From $4 a share in 1973, the parent company’s earnings collapsed to $1.76 in 1975; even cyclical growth companies simply were not supposed to behave this way. “It was a bad scene,” he says.

Of course, “Amo” Houghton was not fired. The fifth generation of his family to head this Corning, N.Y.-based billion-dollar (sales) maker of sophisticated glass products, he was treated more gently by his board than any hired hand would have been. He and his family and their trusts, after all, still own 16% of the stock. Houghton got the chance to remain on and to clean up the mess he had allowed to develop.

During three frantic months late in 1975, Houghton changed Corning’s management style from paternalistic to survival-of-the-fittest. When he was finished, Corning was down to 29,000 employees from its peak of 46,000 worldwide. Among those departing were 1,200 managers; three vice presidents were demoted. A major business, Signetics, was gone. A total of five plants were closed or sold and thousands of products–such main lines as domestic black-and-white TV bulbs, finished Christmas ornaments, and acid waste drain lines–were eliminated. International operations was folded as a separate division. Even Steuben Glass, a commendable family hobby, was squeezed marginally into the black.

Why weren’t the cuts made earlier? Why had Corning been allowed to get so overweight? In his own defense, Houghton says: “It was tough making these cuts, particularly when you lived in a small town where you knew a lot of these people.” He admits that a generation of prosperity had made the company complacent, and reminds listeners that it’s easier to make hard decisions when the pressure is on than when it isn’t. Houghton didn’t act soon enough, but it’s not difficult to understand why he held off, hoping that the economy would pull him through. Where is the businessman who hasn’t from time to time put off making these tough choices when things were going relatively well?

Slimmed down, Corning snapped back with a vengeance in the 1976 economic recovery, and parent company profits per share climbed to a record $4.74; this year they could top $5.40 a share, not counting one dollar or so from its investment in Owens-Corning Fiberglas. But as far as the stock market was concerned, the damage was done: Corning recently sold for $65 a share, about ten times estimated total 1977 earnings, vs. as high as 48 times total earnings in the early Seventies.

“Corning used to be a religion for investors,” says Otis Bradley, director of research at Hornblower, Weeks, Noyes & Trask, “but judged by their record, when earnings briefly looked out of control, something has changed; Corning is no Procter & Gamble.” Another analyst adds: “Corning’s relative growth, peak to peak, is not impressive.”

And yet, in many ways Corning is a much better company than it was in the mid-Sixties when it was held in such awe by Wall Street. It could well be on the threshold of its greatest growth yet. The key is something called low-loss optical fiber. Pound for pound stronger than steel, lighter than cotton, thin as a human hair, flexible as silk, transparent as air, these fibers, drawn from glass, may revolutionize communications. As a conductor of light beams, a given volume of the fibers can carry many times as many impulses as a similar volume of copper wire, and may eventually obsolete the latter in telephone communications–as well as in computers, aircraft and for many military purposes.

The market could eventually be over a billion dollars annually. What is perhaps even more important, Corning, slimmed and toughened, is now in position to exploit its technical advantages. Pre-1974-75, Corning was a decidedly unbalanced company, looking profitable indeed but highly vulnerable. Corning made huge profits because it dominated the business of making the glass envelopes that house TV picture tubes, first for black and white, later for color. Explains Houghton: “In 1966 we had 125% of the domestic market. The extra 25% was due to the high breakage of our glass bulbs by the set manufacturers. We got half our sales and three-fourths of our profits from this single product line.”

Houghton’s biggest mistake was his failure to realize how very vulnerable this near-monopoly had made the company. “You look at a big profit base like that and you expect maybe it will level off and mature, but you don’t expect to lose it altogether.” Yet at one point in 1975, new orders on TV picture tubes were down to zero as the recession was compounded by the Japanese blitz of the U.S. TV market. (Japanese producers buy their tubes from Japanese companies.)

This was not the only blow this proud old company suffered. In his haste to make Corning powerful overseas, and not merely an investor, Houghton had picked up control of Sovirel in France and what became Corning Ltd. in the United Kingdom. In the economic crisis that followed the quadrupling of the price of oil, the British unit sank deeply into the red while the French operation was only marginally profitable.

The worst mess was in Signetics. As a maker of integrated circuits–a business Corning did not understand–its products were sometimes obsolete before they were ever manufactured. In 5 1/2 years, Corning lost $9.5 million pretax. Not only was money lost, but so was valuable executive time. Houghton takes full responsibility for Signetics. Speaking of his vice chairman, William Armistead, Houghton says: “One of the nicest things about Bill is he never mentions Signetics to me these days.” Armistead, then dirrector of research, had advised against the Signetics venture. This glass specialist had no research, manufacturing, or marketing expertise in integrated circuits, and so, no base for competing with those who did. But Houghton overruled him.

By the early part of 1975, says Houghton: “I was damned worried because I could see no sign of a bottom.” To his credit, Houghton didn’t just sit there and pray for recovery. He took decisive and effective action.

In June 1975 Houghton turned around and sold Signetics to U.S. Philips Trust–an affiliate of N.V. Philips–for $28 million.

“In 1975–I mean I was living through a textbook case,” says he. “We shrank. We consolidated. We did more than cut payroll; we changed attitudes. Our managers got a perspective on what goes to the bottom line in a way they never had before.”

Houghton cites a specific case that shows what he means. Because Corning couldn’t get the costs low enough, it couldn’t persuade any range manufacturer to incorporate its smoothtop cooking surface into their products. So Corning went out and started making its own ranges. Unfortunately, its high-priced stoves achieved only marginally profitable volume.

In his massive cutbacks, Houghton sold the range operation to Raytheon’s Amana division, which is doing fairly well with the line and is now a good customer for Corning. Says Houghton: “Now when you do something like that, you take a helluva lot of people out of the process–125 in this case. You don’t have them fabricating and putting in the wiring and packaging and supporting the thing out in the field.

“The missing people are what you notice. What you don’t see is the uplifting of the profitability of the things that remain. What remained wouldn’t be getting the emphasis if the problems had been retained.”

While consolidating international operations with domestic, Houghton changed the kind of executive Corning sent overseas. Before, he says, he and his brother James, who heads international, looked for people fluent in foreign languages, with social graces and who were sometimes less ambitious and hard driving than their domestic counterparts–diplomatic types.

Now he’s sending the most hard-driving, bottom-line-oriented SOBs he can find. To turn around Britain, still in the red, trouble-shooter Oakes Ames, ex-Corning controller, among other things, is on the spot. To spruce up all of Europe, super-sales manager Richard Dulude has also gone over.

Drawing on a yellow pad with purple ink, Houghton compares in detail the Corning of 1967-68 with the Corning of 1977-78. The old Corning was TV, scientific glass, Corning Ware and glass for light bulbs. The present Corning is much broader, thanks in good part to its highly respected $50-million-a-year research effort. TV is now a problem area: It will contribute about 10% of 1977′s record profits. But now that the Japanese have been arm-twisted into cutting back TV exports to the U.S., profits in that area should improve. Complains Houghton: “The Japanese were just going crazy.”

Among Corning’s new profit makers, photochromic glass has given it a firm position as a supplier of prescription eyeglasses and nonprescription sunglasses. Scientific glass–for beakers, test tubes and flasks–has led Corning into a small but important base in medical products. Its new blood-gas apparatus analyzes the content of various gases in the blood, and can’t yet be produced fast enough to keep up with demand. Corning’s close relationship with Detroit, growing from its business of making automobile headlamps, has led to sales of ceramics for auto-emission-control devices. Glassification of nuclear wastes also has great potential in a pollution-conscious world.

Meanwhile, Corning is broadening its base in the kitchen. Besides Corning Ware and Cook Top counters, Corelle dinnerware has been a big success. The glass equivalent of plywood, Corelle now has about 20% of the domestic market, gained after eight consecutive record years. New patterns should help assure a ninth. As microwave cooking continues to catch on, Corning expects the use of Corning glass kitchenware to continue growing; glass alone among the various materials available can be used for cooking, storing and serving.

Houghton also likes to stress that Corning has additional strengths in two old but highly successful joint ventures. Dow Corning, with sales of $354 million, is jointly owned with Dow Chemical and specializes in making silicone products–with properties of both plastic and glass–used for such things as sealants for airplanes and automobiles, and greases and oils for extreme temperature changes (and for making Silly Putty). Corning is a 26% owner of Owens-Corning Fiberglas, a $1-billion company it founded many years ago in partnership with Owens-Illinois. Less successful but still profitable is Pittsburgh Corning, a joint venture with PPG Industries, that makes foam glass insulation and architectural glass blocks.

Corning’s OCF investment is carried on the books at $2 million; its market value is $265 million–about $15 for each share of Corning. Its 50% interest of Dow Corning, held on the balance sheets at only $100 million, earned $21 million last year–over one-fifth its value on the books.

Taking the OCF investment at market value, Corning stock would have a book value of around $48 a share vs. a published book value of $33. At present prices the market is putting very little on the company’s patents, its knowhow, its powerful proprietary positions. Having become disillusioned with the company, the market has failed to notice how much it has changed.

“What we’ve got now–and didn’t have a decade ago,” says Houghton, “is a multiplicity of businesses and profit sources. If ophthalmic disappears because people go to contact lenses or if the government says it’s no longer necessary to have emission-control devices on cars or if the Japanese take over completely the TV business or a new plastic supplants Corning Ware, the impact of any one of those things is not nearly as serious as the impact of TV bulbs was on the old Corning Glass.”

What kept Corning on a kind of treadmill until this year was that as fast as it was gaining volume and profits from new products, it was losing them in TV tubes. Assuming that the bleeding in TV has been stopped, Corning may well have reached a new plateau of profitability; it certainly is unlikely to experience another 1974-75 collapse, even in a recession. Says Houghton: “We’ve got everything from flood-disaster plans to economic-disaster plans.”

Although Amo Houghton is unwilling to promise any miracles, it is clear that his biggest plans involve fiber optics. Of communication by optical wave fibers, he says: “They may do for us in the future what television or lighting did for us in the past.”

Will it? Can Corning make one of those great breakthroughs–like IBM in computers, Xerox in copiers, Corning itself in TV tubes? Fiber optics is the stuff of which businessmen’s (and scientists’) dreams are made.

To explain what Corning has–or may have in fiber optics–FORBES will have to step out of character for several hundred words and do a bit of science reporting. Even if you’ve forgotten your high school or college physics, please bear with us. Otherwise you won’t be able to understand what is at stake.

Like most great breakthroughs, fiber optics rest on a simple enough idea. A city’s sewage system depends on water flowing through iron pipes; its power system depends on electrons flowing through copper pipes (which we call wire). Such copper pipe now connects telephones, cable television, computers and all manner of other information processing gear. That works well enough but it is costly. And it is space-consuming. It limits the amount of communication.

The most common method is plain old copper wire packed in cables. Effective? Sure. But it takes hundreds of thousands of pounds of the stuff to hold together even a small city–most of it laboriously buried beneath the streets.

So why bother with wire if you don’t have to? Most widely used today for long-distance communications is the air itself. Instead of jamming electrons through wire, generators convert them to microwave signals and fling these along the surface of the earth, between a system of relays spaced about 20 or 30 miles apart. The odd-shaped boxes on down-town buildings that remind you of air-raid sirens are the antennas. In the late 1960s microwave replaced copper wire as the mainstay of long-distance phone traffic: more volume at lower cost.

Still more volume may be available from microwaves in the third and newest trick: satellite transmission. Microwaves are broadcast from, say, New York, to a satellite orbiting over Omaha, then bounced to Los Angeles. None of those vulnerable relays high atop the Rockies, and suddenly no more need for laying cable on the ocean floor.

Now imagine the light pipe. Like the copper cable, it would be buried in the ground–but a strand the diameter of a human hair could carry thousands of times more information than the copper wire. Economies of scale? It’s as though General Motors had suddenly found a way to fit 7 million automobiles in a single box-car. Or, to get back to our earlier metaphor, as if you could compress the entire city’s sewage through a single ordinary water pipe.

Here, then, is the immediate promise of fiber optics. Its very long-distance applications are years, perhaps decades off. Microwave is the cheapest–for now. But in the bowels of a particular metropolitan area–where conduits are already becoming choked with thick copper wire–the human-hair-sized glass has almost immediate prospects. Not only is it less bulky and faster than copper; it generates virtually none of the electromagnetic interference that can make a copper wire behave like an antenna instead of a pipe (and create that annoying “cross-talk” often heard on phones).

Likewise, there are great prospects in computers, where light pipes can transmit much more information than copper and without the interference; in instrumentation of all sorts; and in army field cables and navy shore communications. More distant applications: picture telephones, home shopping and airplane avionics. In short, almost anywhere copper wire is used in close quarters or for fine quality–there is a promising opportunity for the light pipe.

The idea of a light pipe is a fairly old one. John Tyndall, an English experimenter, demonstrated one before Alexander Graham Bell invented the telephone. He put a barrel of water in a dark room, a light at the top of it, and punched a hole in the barrel’s side. Streaming out of the puncture, in a curved path with the water, came the light.

But Bell built his telephone to work with copper wire for two reasons: He didn’t know how to build a pipe that would hold light; and even if he did, he knew of no efficient way to get the light into the pipe.

The second problem–getting the light in there–was solved by the invention and refinement of the lightemitting diode and the laser in the past 20 years. Getting an incandescent bulb to shine any distance in a glass pipe is like trying to pour water into the wrong end of a funnel–you lose so much, it isn’t worth it. But the laser and the light-emitting diode produced wonderfully disciplined light–meaning, it would go where and how you wanted it to. The funnel was reversed.

There are many older optical fibers, but low-light-loss ones are vital for telephone cable. Here Corning has a clear lead. “We proved,” Amo Houghton says proudly, “what a lot of people thought was impossible. That we could make the quality of glass fiber necessary to transmit long-distance signals. We have virtually all of the patents as far as the critical materials are concerned.”

What about potential competition? Replies Houghton: “There are 12 basic patents in the field and we have all 12 versus none in integrated circuits [referring to the Signetics disaster]. It’s our turf with our patents.”

In the nontelephone market–where cable will be used in such things as aircraft, computers and defense–Houghton is considering a joint venture–a la Dow Corning–with a cable company. “Joint ventures work well for us,” he says. “We put in our technology and other people put in their downstream capabilities, marketing savvy. Things we don’t have.”

Abroad Corning has been busy doing joint development work with foreign cable makers. In Japan the government is using its fibers in experimentally wiring an entire Japanese town, Nara. In Britain, Corning has been supplying optical fiber to BICC–an archrival of an International Telephone & Telegraph subsidiary. In Germany it has a joint venture with Siemens. Corning would like to manufacture fiber to sell to ITT and has quoted ITT prices several times. Says Corning’s Dr. David Duke, general manager of telecommunication products, “They listened, and, in effect, replied, ‘See you in court.’”

ITT has gone right ahead and made its own fiber optics cable. In England, it has installed a test system in cooperation with the British Post, Telephone & Telegraph. At home its military unit has used fiber optics in some sales to the U.S. government. In Duke’s opinion ITT simply ignored Corning’s patents, and Corning is suing ITT for patent infringement and the U.S. government for damages stemming from that infringement.

In its turn ITT is doing some suing, arguing that Corning cross-licensed AT&T because it wants to sell to Western Electric. ITT argues the arrangement is monopolistic and should be destroyed. If ITT wins, Corning will be faced with instant competition from a knowledgeable well-financed tough competitor.

Two professors from Catholic University in Washington, D.C. pose a second threat to Corning’s potential dominance of the business. The professors, Theodore A. Litovitz and Pedro B. Macedo, claim to have developed a new process for making the fiber, which does not infringe on any Corning patent, at one-tenth Corning’s costs. Claims Litovitz, “If our process really comes up with the specifications we hope, then there will be a real chance for a price battle, and Corning’s profits in fiber optics could suffer severely. Ours is the only alternative process at the moment.”

While the professors have made quite a stir in the press, Corning points out that the fiber produced by the professors has not come up to the quality of the existing Corning fiber–inferior in the important broad band qualities needed for carrying the varied communications of the future. Meanwhile Corning is currently working to obsolete its own current process with an even better one.

While Houghton fully expects Corning to be the dominant company in optic fibers, his recent trials have taught him the key to Corning’s future lies more in good management than in wonder products. “The opportunities in so-called mundane areas like this microwave oven business or the opportunity to bring our percentage of the consumer market in Europe up to what it is in this country could be bigger than optical wave guides. You don’t think of them in terms of the exciting technological advances, but they’re terrific.”

Amo Houghton had a rare second chance–the chance to correct his own mistakes. He’s a thoughtful man of 51 with a more than routine feeling of responsibility for the onetime family firm that was founded by his great-great grandfather in Somerville, Mass. 126 years ago. Of the rough period Corning has just been through he says: “One thing I’ve learned about planning is that you can talk about the long term all you want but you also have to produce good short-term results.”

And he says it again, more bluntly: “If you don’t make a buck today, you’re not going to make it tomorrow.” Meaning, of course, that fiber optics may very well pan out for Corning, but he’s not going to count on it to keep Corning profitable and growing. That’s well and good, but the future is going to judge Amo Houghton by how well he exploits Corning’s present advantage in fiber optics. If he muffs the opportunity, Corning will remain a profitable company. But it will no longer be a great company.